the city of god, part i · 2016-12-09 · 2 lmr no 2016 trump can’t avoid a crash by robert p....

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by Robert P. Murphy

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P U L S E O N T H E M A R K E T

L A R A - M U R P H Y R E P O R T

BUILD ING THE 10%

LMR

TRUMP CAN’T AVOID A CRASH

Page 18

by L. Carlos Lara

Interview With Eric Schuler

UNINTENDED CONSEQUENCES OF FINANCIAL REGULATIONS

THE CITY OFGOD, PART I

“Fake” News FeintIndia’s Cash Crackdown

Elites Hate GoldStockman Says Sell!

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TRUMP CAN’T AVOID A CRASHBY Robert P. Murphy

Yes, Trump will probably be much better for the economy than Clinton, but he can’t undo the malinvestments of the boom.

Economic Deep End

THE CITY OF GOD, PART IBY L . C arlos L ara

A venerable work carries lessons for today--on matters of faith but also financial.

PULSE ON THE MARKET“Fake” News Feint • India’s Cash Crackdown • Elites Hate Gold • Stockman Says Sell!

UNINTENDED CONSEQUENCES OF FINANCIAL REGULATIONSInterview

Eric Schuler explains the unintended consequences of financial ‘oversight’ from DC.

EVENTS ANDENGAGEMENTSLearn more in person from Lara, Murphy, and other Austrian economists, at these upcoming appearances.

LARA-MURPHY REPORT2016 has been a good year for the Lara-Murphy Report.

One More Thing

IN EVERY ISSUE

Dear Readers

4 6 37

THIS MONTH’S FEATURES

1810 29

Overview

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LMR Editor in Chief: L. Carlos LaraLMR Executive Director: Dr. Robert P. Murphy

Managing Editor: Anne B. LaraDesign Director: Stephanie Long

Customer Service: www.usatrustonline.comComments: [email protected] Advertising: [email protected]

READERSSTATUS: LMR staff and its contributors warrant and represent that they are not “brokers” or to be deemed as “broker-dealers,” as such terms are defined in the Securities act of 1933, as amended, or an ”insurance company,” or “bank.”

LEGAL, TAX, ACCOUNTING OR INVESTMENT ADVICE: LMR staff and its contributors are not rendering legal, tax, accounting, or investment advice. All exhibits in this book are solely for illustration purposes, but under no circumstances shall the reader construe these as rendering legal, tax, accounting or investment advice.

DISCLAIMER & LIMITATION OF LIABILITY: The views expressed in LMR concerning finance, banking, insurance, financial advice and any other area are that of the editors, writers, interviewee subjects and other associated persons as indicated. LMR staff, contributors and anyone who materially contributes information hereby disclaim any and all warranties, express, or implied, including merchantability or fitness for a particular purpose and make no representation or warranty of the certainty that any particular result will be achieved. In no event will the contributors, editors, their employees or associated persons, or agents be liable to the reader, or it’s Agents for any causes of action of any kind whether or not the reader has been advised of the possibility of such damage.

LICENSING & REPRINTS: LMR is produced and distributed primarily through the internet with limited numbers of printings. It is illegal to redistribute for sale or for free electronically or otherwise any of the content without the expressed written consent of the principle parties at United Services & Trust Corporation. The only legal audience is the subscriber. Printing LMR content for offline reading for personal use by subscribers to said content is the only permissible printing without express written consent. Photo’s are from various public domain sources unless otherwise noted.

ABOUT LARA & MURPHY

L. CARLOS LARA is CEO of United Services and Trust Corporation, a consulting firm specializing in in business advisory services with a primary focus on work-ing with companies in financial crisis. His background in capital formation and business rehabilitation makes him a regular speaker at credit and business conferences.

In 2010 he co-authored the highly acclaimed book, How Privatized Banking Really Works with economist Robert P. Murphy.

He is a co-creator of the IBC Practitioner Program for financial professionals and sits on the board of the Nelson Nash Institute.

ROBERT P. MURPHY is Research Assistant Professor with the Free Market Institute at Texas Tech University. He is co-author of How Privatized Banking Really Works. He is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute 2015) and co-host with Tom Woods of the popular podcast Contra Krug-man.

Murphy has a Ph.D. in economics from New York Uni-versity. After spending three years teaching at Hillsdale College, he went into the financial sector working for Laf-fer Associates. With Nelson Nash, Carlos Lara, and David Stearns, Murphy is co-developer of the IBC Practitioner Program.

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Lara-Murphy Report

Another year is coming to a close and a new one is about to begin. What a year 2016 has been! So much has been accomplished it is impossible to list everything. But here are just a few that we need to mention because without your help and encouragement they would have remained only ideas.

To start with, 66 IBC Practitioner candidates have been interviewed just this year and many of them have passed through our curriculum becoming official Authorized IBC Practitioners and members. Our ranks of financial professionals in the U.S. and Canada have been steadily growing since the inception of our Program in 2013.

Also, in 2016 Bob and I launched our new website Lara-Murphy.com, a live version of our financial publication The Lara-Murphy Report (LMR). Along with pages of information for those new to Austrian Economics and the Infinite Banking Concept (IBC), the website features resources for an individual, the business owner, and the financial professional. One of the most popular features is The Lara-Murphy Show, a podcast that explains

“So I bring you this message, be of good cheer; be of good spirit. If the battle is not yet won, it is not yet lost either.”

— Henry Hazlitt

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Lara-Murphy Report

the financial markets from the perspective of Austrian economics and Nelson Nash’s Infinite Banking Concepts (IBC).

Finally, in 2016 we were able to perfect the IBC Live Seminar for the general public and we will begin its rollout across the country and Canada. The new and revised version will debut in Birmingham, Alabama –Saturday February 11, 2017.

Armed with these three tools we can deliver the message of IBC and the building of the 10% to an even wider range of audiences. A message that not only helps the Practitioner, individual households and businesses, but can also help shape public opinion to effect a change in monetary policy. The urgency of this message cannot be overstated.

As Henry Hazlitt, one of the most famous of the Austrians proclaimed in one of his last speeches as he passed the baton to the next generation. “The times call for courage. The times call for hard work. But if the demands are high, it is because the stakes are even higher. They are nothing less than the future of human liberty, which means the future of civilization.”

Our Holiday Season’s Best Wishes!

Carlos and Bob

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Pulse on the Market

PULSE ON THE MARKET

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WAPO PUSHES CONSPIRACY THEORY ABOUT CONSPIRACY THEORISTSIn a Nov. 24 article by Craig Timberg that reads like satire, the Washington Post warned its readers of a network of websites pushing “fake news” stories that discredited Hillary Clinton and helped put Trump in the White House. WaPo further reported that the Russian government sits atop this shadowy organization of intrigue and duplicity. The participating websites are either explicitly tools of Putin or “useful idiots” serving him unwittingly.

To repeat, we’re not making this up. The WaPo actually ran this story. Timberg even had the audacity to criticize the “fake news” sites for fueling distrust of American democracy and inculcating conspiracy theories about secret forces shaping world events—which of course is exactly what Timberg was doing in his article! What’s worse, one of the teams (“PropOrNot”) published a list of some 200 websites that were part of this alleged network, including popular libertarian and Austrian economics sites.

In conjunction with President Obama’s post-election handwringing over “fake news”—particularly as certain types of articles are spread on social media sites such as Facebook—we can see the opening stages in a crackdown on alternative news. To the extent that private companies (such as Facebook, Twitter, Google, etc.) “voluntarily” enforce codes of truthiness (Stephen Colbert’s term from a different context) on content, it will be easy enough for the federal government to once again regulate the major news sources for Americans, the way it was back before the Internet.

“ Fake ” News Feint

INDIA TRIAL RUN FOR GLOBAL WAR ON CASH?In a surprise move, on November 8 Indian Prime Minister Narendra Modi declared the old 500- and 1,000-rupee notes to no longer be legal tender. As explained in a Vox article by

India’s C ash Crackdown

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PULSE ON THE MARKET

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Pulse on the Market

Zeeshan Aleem, the proclamation effectively pulls 86 percent of India’s cash out of circulation. Residents have until the end of the year to turn in their now-worthless notes for newly issued 500- and 2,000-rupee notes. However, if someone tries to convert more than 250,000 rupees of cash (which is some $3,650), he or she will have to provide an explanation or pay a large tax plus fine.

The surprise move has been devastating to the Indian people. Tens of thousands are protesting in the streets. There are long lines at the banks as people try to convert the currency. However, the supply of new banknotes is inadequate to meet the demand. Although the ostensible purpose of the measure is to crack down on tax evasion and other illicit activities, it also coerces the average Indian to move from a cash-centric to a cashless society.

This story is unfortunately analogous to the “fake news” feint. Analyzed on their own terms, they are nonsensical. (As the Vox article explains, people who evaded taxes in the past have converted their wealth into other liquid assets, not just currency.) But the moves make perfect sense as preliminary steps in a broader crackdown on personal liberty. The authorities want to control your information and your finances. They can’t come right out and say that, so they stoke fears of meddling Russians and terrorists to justify their power grabs.

TRUMP FLIRTATION WITH ALLISON CAUSES FRENZYAs of this writing, it appears that President-Elect Trump will ask Steve Mnuchin to be his Treasury Secretary. This is too bad, as Mnuchin is a consummate insider who is a former Goldman Sachs partner. (Interestingly, after leaving Goldman Mnuchin founded a company that produced, among other films, the X-Men franchise and the recent Batman vs. Superman.) The pick makes sense because Mnuchin was the finance chair in Trump’s presidential campaign.

El ites Hate Gold

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Pulse on the Market

PULSE ON THE MARKET

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However, before the apparent selection of Mnuchin, Trump had met with ex-BB&T CEO John Allison. A very public fan of Ayn Rand, Allison had used the BB&T Charitable Foundation to steer millions of dollars to higher education to promote Rand’s defense of free enterprise. After leaving BB&T in 2010, Allison was the head of the Cato Institute (a libertarian think tank headquartered in DC) from 2012-2015.

In 2013 Allison gave a speech (available at: https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2014/5/cato-journal-v34n2-9.pdf ) at a Cato monetary conference, in which he pointed out the problems with Dodd-Frank, called to abolish the Fed and the FDIC, and wanted a return to “a private, free-banking system based on a market standard such as gold.” Hey, this is our kind of guy!

Naturally, the establishment press went berserk. For example, on Twitter Josh Barro (senior editor at Business Insider and son of economist Robert Barro) declared, “John Allison is opposed to federal deposit insurance. He’s a nutcase.” Allison’s support for gold was further proof to Barro that he was “totally out there.”

These are all topics that we cover in much greater detail in our book, How Privatized Banking Really Works. Just as government is screwing up health insurance, so too does it create “moral hazard” with federal deposit insurance. Specifically, by insuring checking accounts (now up to $250,000), the government removes the incentives for depositors to care about the safety of a bank’s loan portfolio. FDIC gives Americans a false sense of security, when in fact—as Carlos points out in the IBC Seminar—the official reserves in FDIC cover less than 1 percent of the total deposits in the US commercial banking system.

As Bob’s article in this issue will amplify, the candidates for Treasury Secretary showcase the hope and tragedy of Donald Trump: He is a novice in politics and so even his unfiltered outbursts are occasionally much better informed than the polished “statecraft” of veterans such as Hillary Clinton or Newt Gingrich. Unfortunately, Trump appears to have no coherent philosophical or economic worldview, meaning that in practice he may end up promulgating the establishment agenda after all.

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Pulse on the Market

PULSE ON THE MARKET

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DAVID STOCKMAN STILL BEARISH ON US STOCKS AND BONDSFormer Reagan Budget Director—and headliner at our last “Night of Clarity” event in downtown Nashville—David Stockman has not been fazed by the “Trump rally” in US equities. In interviews and on his website, Stockman continues to warn that a market crash is coming, and that bond yields will soar. Stockman still recommends “cash and gold” though he also gives more nuanced guidance on particular put options. We would merely add that when Stockman says “cash” he is referring to very safe and liquid dollar-denominated assets, which is exactly what Nelson Nash’s Infinite Banking Concept (IBC) provides: a warehouse of wealth, to use the title of one of Nash’s books.

Stockm an Says Sell !

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Trump Can’t Avoid a Crash

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At the recent Freedom Advisor event in St. Louis, Carlos and I shared our thoughts on the U.S. economy in light of Donald Trump’s shocking election. After our discussion, one of the attendees said to me, “Bob, that was the most optimistic I’ve ever heard you!”

It was true. Both Carlos and I were thrilled that Hillary Clinton had lost. My quick sum-mary was that Donald Trump shoots from the hip and has no overarching philosophy of politics or economics, meaning that just randomly half of his ideas are going to be

some of the economists advising Trump.

THE “TRUMP RALLY” MAKES SENSE

After an initial plunge during the election night itself—reflected in markets around the world, and in futures contracts for U.S. equities—stocks rebounded sharply after Trump’s surprising victory. (As of this writ-ing, the S&P 500 index is up about 4 percent


Even though David Stockman for example dismisses the stock surge as due to “robo machines,” there is an underlying logic to some of the

specific movements.

good. In contrast, all of Clinton’s economic policies would have been systematically bad.

Notwithstanding my (relative) hope, nothing Trump will do can avoid the coming crash that the Federal Reserve has baked into the cake. If anything, a switch to more sensible economic policies would actually make the crash occur sooner. In this article, I’ll first ex-

plain my counter-intuitive claim—namely, that better economic policies will trigger a quick-er downturn in the short run—and then I’ll explain why I am cautious-ly optimistic about

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at nearly $4 trillion over ten years.1 And although he’s no advocate of laissez-faire, Trump will presumably be less eager to em-brace further business regulations compared to Hillary Clinton. Trump has said eminent-ly sensible things on some economic mat-ters, such as allowing more energy leasing on federal lands and rolling back the EPA’s crippling rules on coal-fired power plants. (Trump explicitly cited a study put out by the Institute for Energy Research, for which I’m the senior economist, when explaining the boon in job growth and wages, and bil-lions of extra revenue for the government.2)

since his win, hitting all-time highs.)

Moreover, even though David Stockman for example dismisses the stock surge as due


Trump has said eminently sensible things on some economic matters,

such as allowing more energy leasing on federal lands and rolling back the

EPA’s crippling rules on coal-fired power plants.

to “robo machines,” there is an underly-ing logic to some of the specific move-ments. For exam-ple, pharmaceutical stocks jumped 2 to 8 percent the day after the election, presumably be-cause investors had

been worried that a Clinton Administration would crack down on drug prices.

On the other hand, by mid-November the Mexican peso was down about 10 percent against the dollar, presumably reflecting the harsher policies from a Trump Administra-tion.

All in all, I think the equity movements “make sense” in relative terms. Trump is pro-posing massive cuts in corporate and person-al income tax rates, which have been scored

THE STOCK MARKET WILL STILL CRASH

Yet even though Trump will likely implement much better economic policies, all told, than what Clinton

would have provided, I stick to my constant warnings since Ben Bernanke instituted the various “QE” programs: The U.S. stock mar-ket has been pumped up by the Fed. The

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markets are inflated well beyond a sustain-able level. A big crash is still coming.

Remember that in the Austrian explana-

boom, when businesses are hiring and ev-erybody feels rich.

In the standard Austrian tale, once an un-sustainable boom is underway, the crash is inevitable. It is simply a “return to reality,” as Nelson Nash likes to describe it. Given that the Fed has pumped in an unprecedent-ed amount of “high-powered” money since 2008, and has kept interest rates at virtually zero for years on end, the U.S. economy is infested with malinvested capital. In Mis-es’ metaphor of the master builder, it is as if we have been building a house according


Once an unsustainable boom is underway, the crash is inevitable. It is simply a “return to reality,” as Nelson Nash likes to describe it.

tion of the business cycle, it is monetary policy that is the culprit. Sure, high taxes and burden-some regulations can cripple eco-nomic growth, reduce corporate profits, and lower real wages, but these are level effects. They simply make Americans poorer than they otherwise would be. High taxes and silly regulations by themselves don’t cause the boom-bust cycle. There is no reason for high taxes to make entrepreneurs think the future is brighter than it really is.

No, in order to fool business owners into starting unsustainable projects, the mischief must come through the monetary channel. A flood of “cheap money” at artificially low interest rates provides faulty signals to en-trepreneurs. This leads to an unsustainable

to blueprints that assume we have more bricks at our disposal than we really possess.

Now in this en-vironment, even if a new Trump Ad-ministration cuts

taxes and rolls back various regulations, this won’t avoid a crash. These better policies will help, to be sure. (And indeed massive cuts in government spending would be welcomed too, though Trump doesn’t even pretend he’s going to deliver on that front.) But they can’t reverse the years of malinvestments that oc-curred due to monetary inflation and artifi-cially low interest rates. To return to Mises’ analogy: If all of a sudden we take the blind-folds off the bricklayers that had been placed on their eyes by a prankster, then they will be more productive. But we can’t magically generate extra bricks.

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the Fed is a bit of a red herring. In mid-No-vember, St. Louis Fed president James Bull-ard said that only a “surprise” would keep the Fed from hiking rates again in December.5 Private analysts are forecasting several rate hikes through 2017.

In the aftermath of Trump’s election, 10-year nominal Treasury yields went from 1.8 percent to 2.2 percent. Looking at yields on inflation-protected Treasuries (i.e. TIPS), about 15 basis points of this rise could be at-tributed to higher prospects of “real” growth, while the rest would be due to higher (price) inflation expectations. Yet the dollar has

WILL TRUMP REPLACE YELLEN?

Ironically, a return to “sound money” poli-cies would bring the crash on immediately—just like making the heroin addict go cold turkey causes the agony of withdrawal in the


St. Louis Fed president James Bullard said that only a “surprise”

would keep the Fed from hiking rates again in December.

short run, but is far better for the pa-tient than to con-tinually increase the doses of the drug.

In this context, analysts have noted that in light of cur-rent vacancies that President Obama has not filled, a new President Trump could fill a majority of the Fed’s seven-member Board of Governors with his own nominees over the course of 18 months.3 The term of Janet Yellen herself expires in February 2018. So if Trump heeded the advice of the hard money folks who have his ear—such as Judy Shel-ton4 and John Allison, both fans of the clas-sical gold standard—he could have a truly significant revolution in monetary policy.

However, in terms of postponing a stock market crash, this discussion of shaking up

also strengthened about 5 percent against the euro since Trump won. A natural way to explain all of this is that Trump’s victo-ry made investors expect a stronger

economy (which they incorrectly associate with rising prices) which in turn would put pressure on the Fed to hike interest rates sooner than it would have done with a lack-

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told. For example, check out this quotation from the Trump team’s white paper:

Donald Trump’s tax, trade, regulatory, and energy policy reforms deal with the root causes of this problem. Trump understands that our economic prob-lems are long run and structural in na-ture and can only be addressed by fun-damental structural reforms.

This is a key distinction between Don-ald Trump and an Obama-Clinton strategy that has relied so heavily – and

luster Clinton economy.

Finally, let me remind readers that it was Ben Bernanke who was the madman behind the printing press. In contrast, Janet Yellen came in just as the Fed had begun its “taper.” The Fed has merely been rolling over its as-sets since the fall of 2014, neither growing nor shrinking its balance sheet.

TRUMP’S MAIN ECONOMIC ADVISOR IS NO FOOL


Navarro and Ross argue that this combination of tax structures

rewards U.S. firms who relocate abroad, even if they’re planning on

selling to Americans.

Peter Navarro is a business profes-sor at UC Irvine, and holds a PhD in economics from Harvard. Along with private eq-uity investor Wil-bur Ross,6 Navarro wrote the formal economic analyses of Trump’s economic agenda for his campaign. Even many free-market economists panned Navarro’s analy-sis, but it’s much better than you’ve been

futilely – on repeated fis-cal and mon-etary stimuli. All we have gotten from tilting at K e y n e s i a n windmills is a doubling our of national

debt from $10 trillion to $20 trillion under Obama-Clinton and the weak-est economic recovery since World War II – combined with depleted in-frastructure and a shrunken military.

Now to be clear, I disagree strongly with Trump’s rhetoric and policy proposals when he talks about international trade. It’s true that NAFTA and other “free trade” deals are improperly named—you don’t need hun-dreds of pages to roll back tariff rates. Even so, much of what Trump says in his off-the-cuff remarks about trade deficits and out-

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sourcing is simply ignorant.

However, my modest point in this section is to alert readers to the fact that Navarro is not a simple mercantilist. In fact, Navarro and Ross go out of their way to say that Trump is not advocating mercantilist policies.

Instead, what they argue is that the cur-rent structure of U.S. and European tax codes places U.S. manufacturers at a huge

relocate abroad, even if they’re planning on selling to Americans. Now to be sure, many


There is a similar discrepancy between Trump’s rhetoric on

infrastructure, and the actual plan put forth by his team.

disadvantage, and perversely gives domestic compa-nies an incentive to outsource op-erations abroad in order to sell back to the American market.

Specifically, European (and many other) governments rely heavily on a Value Added Tax (VAT). In practice, if (say) a German company exports goods to the U.S., then the German government rebates the relevant VAT payments back to the firm.

In contrast, if a U.S. manufacturer exports goods to Germany, then it still has to pay corporate and other income taxes to the U.S. federal government. There is no rebate for operations pertaining to the German ex-ports. Furthermore, the U.S. government has no jurisdiction to levy income taxes on Ger-man firms.

Navarro and Ross argue that this combina-tion of tax structures rewards U.S. firms who

economists have a response to this type of claim; I’ve linked to my dis-cussion of the issue with Tom Woods in the endnotes.7 But for our purpos-es the point is that Trump’s campaign

economist wasn’t a fool who was ignorant of Adam Smith and David Ricardo. Instead, he was making a prima facie plausible argu-ment about the perversities in the U.S. tax code vis-à-vis major trading partners.

KEYNESIANS VERSUS FREE MARKETEERS ON “INFRASTRUCTURE”

There is a similar discrepancy between Trump’s rhetoric on infrastructure, and the actual plan put forth by his team. To hear Trump (or his chief strategist Stephen Ban-non) talk about it, one might view the big infrastructure plan as a Depression-era make-work program fueled by huge govern-

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cushion to absorb such risk is required by lenders.

The size of the required equity cushion will of course vary with the riskiness of the project. However, we are assuming that, on average, prudent leverage will be about five times equity. Therefore, financing a trillion dollars of infra-structure would necessitate an equity investment of $167 billion, obviously a daunting sum.

…

To encourage investors to commit such large amounts, and to reduce the cost of the financing, government would provide a tax credit equal to 82% of the equity amount.

ment spending.

However, if you read the Navarro/Ross white paper released in October,8 here is what you find:

The Trump infrastructure plan features a major private sector, revenue neu-tral option to help finance a signifi-cant share of the nation’s infrastructure needs. For infrastructure construction to be financeable privately, it needs a revenue stream from which to pay op-erating costs, the interest and principal on the debt, and the dividends on the equity. The difficulty with forecasting that revenue stream arises from trying to determine what the pricing, utiliza-tion rates, and operating costs will be over the decades. Therefore, an equity


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References

1. For a laudatory take on Trump’s tax proposals from Reagan-era supply-siders, see: http://www.bloomberg.com/politics/articles/2016-06-13/less-costly-trump-2-0-tax-plan-urged-by-reagan-era-economists.

2. On Trump’s mention of IER’s study on federal energy leasing, see: http://instituteforenergyresearch.org/press/trump-cites-ier-study-speech-energy/.

3. On the foes and fans of Trump reshaping the Fed, see: http://www.politico.com/story/2016/11/what-will-trump-do-with-federal-reserve-231606.

4. On Judy Shelton’s views, see: http://fortune.com/2016/08/18/trump-gold-standard-economic-advisor-woman-judy-shelton/. On BB&T’s ex-CEO John Allison’s views, see the Pulse on the Market in this issue of the LMR.

5. See: http://www.reuters.com/article/us-usa-fed-bullard-idUSKBN13B0PO.

6. See the Navarro and Ross white paper at: https://assets.donaldjtrump.com/Trump_Economic_Plan.pdf.

7. See Episode 55 of the “Contra Krugman” podcast here: http://contrakrugman.com/ep-55-krugman-trump-and-trade/.

8. See: http://peternavarro.com/sitebuildercontent/sitebuilderfiles/infrastructurereport.pdf.

Note that Trump’s advisors are talking about tax credits to spur private investment in infrastructure. Furthermore, they argue that because of enhanced growth, tax receipts from conventional sources will grow such that the net effect on the government’s cof-fers is negligible.

I am not endorsing the specific numbers or the overall wisdom of such a plan. I am merely pointing out that the people Trump chose to formalize his off-the-cuff boasts about having a bigger infrastructure plan than Hillary, did so in as free-market a way as we can imagine. This is a very good sign, which gives me guarded hope that Trump might actually push economic policies that aren’t half bad.

CONCLUSION

Donald Trump is of course a very contro-versial figure. Indeed, he learned early on that his only chance of winning was to curry controversy and the associated media cover-age.

Let me state for the record that I dislike Trump’s reckless style and of course his boor-ish comments about women. Furthermore it alarms me to imagine what President Trump would do to civil liberties, if there is another major terrorist attack on U.S. soil. (On the other hand, Trump could get away with “be-ing moderate.” In contrast, Hillary Clinton would have to show her male critics she could be tough and in that sense arguably might have been worse at the helm in such a situation.)

Yet despite these flaws, Trump will almost surely usher in much saner economic poli-cies and possibly even wiser foreign policy, compared to a President Hillary Clinton.

Does my newfound optimism mean I no longer foresee a crash? No, it doesn’t: I still think a crash is in the cards, and that house-holds and businesses should prepare just as Carlos and I have been warning all along. Ben Bernanke blew up a giant asset bubble, and not even Donald Trump can keep it from popping.

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The City of God, Part I

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WhAt is truth? Would We recognize it if we saw it, heard it or experienced it? Can we actually know the reality of the world? Would it be reasonable to say that if we could posses such knowledge that we would be in the possession of a great power? But where can this knowledge be found and if we should find, it how can we be sure, without a shadow of a doubt, that it is authentic? That it is the real truth.

To actually probe this subject and write on it is an undertaking that I have often con-sidered but until now had no meaningful way to properly introduce it to LMR read-


What happened in the case of these two events underscored for me just how uncertain and unpredictable the future really is.

ers. Besides, who am I to think that I could with any significant meaning unravel such a deep mystery? The fact is that I can’t. Even to attempt such a project would require reli-ance on preeminent sources that have actu-ally plumbed the depths of this theme.

But two surprising events occurred this year that provided me the opportunity and impetus to finally take the plunge. One of these events was Brexit, which occurred ear-lier this year. The other occurred just a few short weeks ago with the election of Don-ald Trump as President of the United States.

What happened in the case of these two events underscored for me just how uncer-tain and unpredictable the future really is. Everything in life is guesswork. Even the losers in the Brexit vote and in the Presiden-tial election were shocked and bewildered, never dreaming this outcome would actually happen.

Yet it did happen and remarkably we all witnessed in astonishment as international organizations that have for decades towered as great emblems of global unity had their foundations shaken to the core. It’s as though the so-called smart guys who were in control of globalization have been suddenly thrown out of control and now they’re scrambling, wondering what can possibly come around the next corner. In effect we experienced to our own amazement the average person repudiate the whole idea of a “New World Order.”

These events were so uniquely rare and un-expected that they forced me to think deeply

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In my third illustration I recognized the relevance of The Politics of Obedience,1 that 16th century document written by Étienne De La Boetie, one of our most favored he-roes from the past. Often we have spoken and written about Étienne’s insight in this masterful discourse where he answers the mysterious question of why it is that people obey the government. The astonishing an-swer he gives us is that they enslave them-selves by letting themselves be governed by tyrants. But the way to freedom, he says, is that these tyrants fall when the people sim-ply withdraw their support.


We experienced to our own amazement the average person repudiate the whole idea of a “New World Order.”

about the power of the human will. Upon reflection I was able to catch sight of three shining examples of what the 10% move-ment that we often speak and write about might actually look like in real life when it suddenly explodes into a reality. I caught the vision of how the minority— represent-ed in the form of the “little guy”— suddenly morphs into the powerful majority by hold-ing fast to unshakable beliefs.

In the second example, my observation confirmed the main point in Mises’ argu-ment about the power vested in the nature of the masses. He is right. The masses are the ones who ultimately determine the course of public opinion and when they make their choice in unison their choice becomes final.

But the way to freedom, he says, is that these tyrants fall when the people simply withdraw their support.

These lessons learned from real life expe-riences and from history often confirm that ultimate power rests in the individual—or

more accurately—the people. But the real question at hand and the one in particular for the theme of this article is, who in the final analysis, is behind the human will? Expressed in a different way: Can we know who is really in charge? In the broader context, who is ul-timately responsible for the found-ing and maintaining of world pow-ers? Is it the will of man or is it the omniscient power of God?

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THE HISTORY AND ORIGIN OF THE WORLD

To attempt to answer some of these pro-found questions I began exploring The City of God,2 a one thousand-page manuscript written in 426 A.D. by Augustine of Hippo, a philosopher-genius and theologian who is said to have written the only philosophy of the history of the world known through-out Europe during the Middle Ages. It has been a dominant force in Christian thinking ever since its publication. Written over a pe-riod of thirteen years it occupied Augustine’s senior years—from his fifty-ninth to his sev-enty-second year. It is his most celebrated book and treasured by those that seek to ex-plore the realm of the supernatural.

It was Dr. David Lawrence, a retired his-tory professor from David Lipscomb Uni-versity, who directed me toward this book and its great variety of ideas. In addition,


Surprisingly, Augustine’s knowledge of Roman literature and the systems of Greek philosophy is extensive and is expressed quite liberally throughout this great masterpiece.

a close personal friend, Dr. Andrew Burton, who had been reading the book with much enthusiasm, also recommended it to me.

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Both men assured me I would not regret the experience. Although I will admit that it’s an awfully big and intimidating volume, ever since I picked it up and began reading it I have remained spellbound by its contents.

It’s important to note that Augustine is not only held in great esteem by the Ro-man Catholic Church, but also by the great church reformers such as Martin Luther and John Calvin. But before you quickly dismiss this book as simply being nothing more than Christian theology and therefore a biased study on my part, let me assure you that it is anything but that. Surprisingly, Augustine’s knowledge of Roman literature and the sys-tems of Greek philosophy is extensive and is expressed quite liberally throughout this great masterpiece. All that is valuable in the moral, political, philosophical, and religious expanse of the classical nations of antiquity can be found here expressed brilliantly in easy to understand English—(a tribute to its translator from the Latin, Reverend Marcus Dods, D.D. 1871).

Augustine portrays all Greek philosophers who wrote six centuries before Christ as respected think-ers and educators with his attention to the teachings of Plato in particular as the closest approximation to Christian truths. He was convinced that Plato had read Genesis in order to ar-rive at his own interpreta-tions of the world’s creation.

After all, Genesis was written long before any of the Greek philosophers came into ex-istence.

But it was the book’s purpose and the time when it was written that most captivated my attention and made me want to read it. I could not overlook the striking relevance to that particular period in time and compare it the events and circumstances of our own day. The book allowed me to experience a more profound view of history that I hope to share with you.

A CITY WHICH HATH FOUNDATIONS, WHOSE BUILDER AND MAKER IS GOD

In his own words, Augustine describes the occasion and plan for his endeavor.

“Rome having been stormed and sacked by the Goths under Alaric their king, the wor-shippers of false gods, or pagans, as we com-monly call them, made an attempt to attri-


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glory if she would just return to the simple, robust and noble mode of life, which char-acterized the early Romans. The problem as he saw it was her outrageous extravagance, effeminacy, and the pride of her citizens that had corrupted her from within. But the more he thought about Rome’s destroyed great-ness and at the sudden awareness of the in-stability of all powerful world governments, even the likes of Rome, he begins to direct his readers to the fact that there is another kingdom on earth—“a city which hath foun-dations, whose builder and maker is God.”

What Augustine sets out to demonstrate is that human history and human destiny are not wholly identified with any earthly power. He teaches his readers a different and deeper view of history by demonstrating that from the very beginning God’s people have lived alongside the kingdoms of this world and have been silently growing in numbers. The heavenly origin of this city ensures its ever-lasting success. He even went as far as to say that the fall of Rome may actually cause

bute this calamity to the Christian religion, and began to blaspheme the true God with even more than their wonted bitterness and acerbity. It was this which kindled my zeal for the house of God and prompted me to un-dertake the defense of the city of God against the charges and misrepresentations of its as-sailants.”3

Right here, before going any further, it’s important to step back and recall that after more than a thousand years of steady and triumphant progress Rome—“the mistress of the world,” as she was often called—had been defeated and plundered. It is difficult to appreciate the magnitude of the shock that reverberated throughout the known world upon hearing this frightening news. It was generally believed that Rome was indestruc-tible in the same way we often think about


It was generally believed that Rome was indestructible in the same way we often think about our own United States.

our own United States. Both Christian and pagan alike believed that the destruction of Rome would inevitably mean the end of the known world.

Even Augustine laments the fall of Rome, calling it one of the greatest of all calamities. But he was not without hope of her future claiming that she could return to her former

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the spread of Christianity to increase all the more, a fact that actually came to pass.

IN THE BEGINNING GOD CREATED…

Christians even to this day are ridiculed for their audacious attempt to integrate an un-seen and unbelievable God, who resides in eternity and outside of time, with the natural world, which is in time. This is what we are grappling with here in reading this profound text in which Augustine’s thoughts are so abstract that they utterly fascinate us and holds us captive. The City of God more than succeeds in its ability to trace and describe God’s direct role in human affairs with un-equivocal ease and piercing accuracy. We see in reading it why the world has set this among the few greatest books of all time. He carries us into the world of the occult and convinces us that it is more real than the world we see with our own eyes.

But he doesn’t stop there. Augustine goes on to explain how this eternal God actually comes into time, and even more incredible than that, he describes how God comes in the form of a man and dwells among us. To fully appreciate what Augustine was up against in attempting to explain all of this, consider that what he was actually doing is expounding and justifying the entirety of the Christian faith to enlightened men who


What he was actually doing is expounding and justifying the entirety of the Christian faith to enlightened men who were dazzled by the splendor of world empires.

were dazzled by the splendor of world em-pires. His goal was to distinguish Chris-tianity and show its superiority to all other forms of truth that were competing for su-premacy during this time. This was a task even he recognized might be beyond his ability—a feeling most Christians struggle with all the time.

Christians today actually have more to work with than what he did. This was a time when written texts were rare. Most knowledge was shared through oration. He knew Roman literature, he understood the systems of Greek philosophy, and he had the Old and New Testaments. Yet he knew very little Greek and no Hebrew at all, therefore, he could not decipher the special nuances in

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days of creation. The word “light” in the scripture text says “And God said, ‘Let there be light’ and there was light.” This Augustine says is the creation of the angels!

“—And then when all things, which are re-corded to have been completed in six days, were created and arranged, how should the angels be omitted, as if they were not among the works of God, from which on the seventh day He rested? Yet, though the fact that the

scriptural texts that these languages could afford him. Still we owe to Augustine one of the most comprehensive systematic exposi-tions of the triune God—one of the most debated features of Christian thought be-cause at the center of it is Jesus—the son of God.

To thread the proverbial needle Augus-tine started at the very beginning. He went straight to the account in Genesis and dis-mantled it word for word expounding on each event in connection with its true cause and in real time sequence. For this reason he begins with the fall of the angels in a manner I had never in my life heard or read before.

AND GOD SAID, “LET THERE BE LIGHT”…

Augustine’s exhaustive search of the scrip-tures allows him to declare that the angels did not reside with God in eternity. They are created creatures, as we are created and that they were created in time during the six


If you have ever wondered, as I have for as long as I can remember, how the speaking serpent suddenly appears out of nowhere in the garden narrative to tempt Eve, Augustine’s analysis of creation makes perfect sense.

angels are the work of God is not omitted here, it is indeed not explicitly mentioned; but elsewhere Holy Scripture asserts it in the clearest manner.”4

The scriptural texts in the book of Genesis that immediately follow this particular passage states “…and He separated the light from the darkness.”5 Augustine interprets this as the separation of the good angels from those that had been given the will to fall away. This

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important part of creation occurred by the end of the first day. If we read the account for ourselves in our own Bibles we discover that the stars, the sun, and the moon (the other forms of visible, natural “light”) were not created until the fourth day. Man was created on the sixth day.

If you have ever wondered, as I have for as long as I can remember, how the speak-ing serpent suddenly appears out of nowhere in the garden narrative to tempt Eve, Au-gustine’s analysis of creation makes perfect sense. For even if we had not known of

both the children of the “flesh” and the chil-dren of the “promise” in every man, woman, and child born into the world since then.

Augustine, in these twenty-two books, traces the growth of these two cities before and after the fall, continuing with Cain and Abel, the first children of Adam and Eve. From there he moves to Noah and the flood, to Abraham, and to the Kings of Israel. He connects the Old and New Testaments to Christ the Messiah, and on to the end of the world as described in the last book of the ca-nonical Bible. Is it any wonder that Augus-tine has been proclaimed as the preeminent expounder of the doctrine of Original Sin?

CONCLUSION AND RELEVANCE FOR TODAY

Aside from the quick parallels we can each draw between the Roman Empire before its collapse and the United States, there is one other relevant concern we should consider. Only a few short weeks ago, Bob and I pro-duced a video to assist individuals in weath-ering the coming economic storms we fore-see heading our way. We have also given live public presentations and have written articles on the subject. In order to make better decisions on how best to insulate ourselves from these storms we categorized them into three broad classifications, which we referred to as storm “A,” storm “B” and storm “C.” (See my article in the Septem-ber 2016 LMR entitled “Man Made Earth-quakes,” and “How To Weather The Coming


Mankind contains both the children of the “flesh” and the children of the “promise” in every man, woman, and child born into the world since then.

the serpent’s origin, (a fallen angel), before reading Augustine’s account, we are never in doubt of the serpent’s motive and that he is an enemy of God.

Hence, beginning with the account of the creation of the world in Genesis, Augustine begins with the holy angels simply because they constitute a large part of The City of God. The fall from holiness of part of the angels and subsequently the fall of the first man and woman (Adam and Eve) set into mo-tion the destinies of these two cities— the earthly and the heavenly. Mankind contains

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References

1. La Boetie Discourse of Voluntary Servitude. (1552) https://www.youtube.com/watch?v=x2y4qJIr5Vg, PDF, Introduction and footnotes copyright 1975 by Murray N. Rothbard, Originally Published in Canada, By Black Rose Books, Montreal, This Edition, Copyright The Mises Institute, Auburn, Alabama

2. St. Augustine’s City of God and Christian Doctrine by Phillip Schaff, (1819-1893) Grand rapids Michigan, Christian Ethereal Library, New York: The Christian Literature Publishing Co,, 1890 NPNF1-02. St. Augustine’s City of God and Christian Doctrine

3. Rev. Marcus Dods, D.D., The City of God, Translators preface, Page 6. NPNF1-02. St. Augustine’s City of God and Christian Doctrine

4. City of God, page 302

5. ESV, Study Bible, Wheaton, Illinois Copyright 2008, by Crossway, page 50

Financial Storms,” Parts II, in the 2015 & I May and June issues.)

In a “C” type storm, the descriptions grow much more dreadful because they move be-yond the economic and into the domain of civil unrest. The potential for a world war

nately, religious advocates are not always all on the same side and are in fact many times in direct opposition to each other. Here is where the will of any one human being can become lethal if religious differences get out of control.

The City of God is a profound book. There is so much we can all learn from it. Of course the search for truth remains an on-going struggle. The fact that we know only in part keeps every human in a state of perpetual anxiety until the day he draws his last breath. We ask our Higher Power to be able to know all of the details in every life situation, but the simple reply we often may receive is that we should only have faith and believe.

Next month using the book, City of God, the LMR will explore the nature of evil and whether or not God created it in THE CITY OF GOD —PART II.

In a “C” type storm, the descriptions grow much more dreadful because they move beyond the economic and into the domain of civil unrest.

becomes more heightened. Who among us can overlook the fact that we now have the weaponry to literally incinerate the entire planet? If we seriously ponder it, our dilem-ma is much more serious than Rome’s ever was. The end times as portrayed in sacred wittings place our generation a lot closer to “the last days” than they were.

Even agnostics should pay heed to the om-inous signs to which sacred writings point us, for the simple reason that billions of peo-ple support these theological analyses with a fervor that includes for many the giving up of one’s life for the cause of God. Unfortu-

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Unintended Consequences of Financial Regulations

Eric Schuler earned his Bachelor’s degree from Boise State University in Economics and Accountancy. He previously worked as a CPA for KPMG, one of the Big Four public accounting firms, where he performed financial audits on both publicly-listed and privately-held entities. He is currently working as a Reporting Analyst for Umpqua Bank, a large community bank located in the Pacific Northwest. Outside of work, he is the creator of the satirical news blog The Daily Face Palm and is also a regular contributor at The Libertarian Institute.

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The views expressed below are solely his own and do not reflect the views of his current or

past employers.

Lara-Murphy Report: How did you become interested in Austrian economics?

Eric Schuler: Dr. Ron Paul’s presidential cam-paign in 2008 was the spark for me. That campaign coincided with my senior year in

that persists to this day.

I decided to pursue economics further in college, and I was thrilled to discover that my university happened to have an excellent Austrian professor in its economics depart-ment--Professor Allen Dalton. Studying under him helped solidify my understanding and interest in the Austrian School.

LMR: Earlier in your career you were heavily involved in compliance with Sarbanes-Ox-ley. Before diving into your experiences, can you remind our readers what had happened to provoke this new legislation? And what did the new regulations call for?

ES: A string of high-profile corporate fraud scandals helped pave the way for Sarbanes-Oxley. The most notorious of these scandals was the Enron Corporation, which used fraudulent accounting practices and a com-plex corporate structure to inflate earnings and disguise losses. Enron went from having all-time highs in its share price in mid-2000, to declaring bankruptcy just over a year lat-er in late 2001. In that scandal and others, shareholders collectively lost billions of dol-lars. This naturally led to calls for Congress to take action to prevent it from happening it again. Sarbanes-Oxley was the result.

Broadly speaking, the cause of these cor-porate scandals was attributed to two key factors: the lack of appropriate internal con-trols, and the failure of the external auditors, which had given Enron and others a clean audit opinion just months prior to their col-


“Dr. Ron Paul’s presidential campaign in 2008 was the spark for me.”

high school, and it was the first time I really thought deeply about politics or economics. It sent me down the path of reading many heterodox and libertarian perspectives on foreign policy and economics to better un-derstand Dr. Paul’s ideas. The experience left me with a passion for economics and politics

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lapse. Sarbanes-Oxley was designed in large part to address these problems. Among its key provisions, the act required public com-panies to implement a robust set of internal controls; it required company executives to personally certify that their internal controls are operating effectively and the financial statements are appropriately stated; and it re-quired external auditors to opine on both as-sertions. Previously, external auditors would have only issued an opinion on the financial statements and disclosures, not controls.

For readers who might not be familiar with the term, internal controls encompass a variety of different business procedures that help ensure compliance, prevent fraud, and ensure financial statements are appropriately stated. This would include everything from, say, requiring the CFO or controller to re-view and sign off on checks to ensuring that only appropriate personnel have the ability to make entries in the accounting system. It would also include having qualified employ-ees review draft financial statements and dis-closures for accuracy prior to their publica-tion. Many of these procedures are common sense and would be implemented in some form, even in the absence of regulations re-quiring them. However, prior to Sarbanes-Oxley, there was likely considerable varia-tion in how comprehensive and, especially, how well-documented the internal controls were in each company. Thus, the passage of Sarbanes-Oxley effectively required public companies to expand and overhaul their ex-isting control environment in order to com-ply with the act.

LMR: Now that you’ve brought us back up to speed, what was your experience in the ac-tual effects of Sarbanes-Oxley?

ES: I should begin by offering the disclaim-er that I did not begin working as an audi-tor until after Sarbanes-Oxley was passed. That said, the effects of Sarbanes-Oxley on the auditing profession could be identified by contrasting the audit approach taken for


“We can roughly think of a private company audit as the type of audit that

would be demanded by investors in the absence of Sarbanes-Oxley.”

public companies against the approach used for audits of privately-held companies. As mentioned above, public company audits now have to include an opinion on the com-pany’s internal controls while private com-pany audits do not. Thus, we can roughly think of a private company audit as the type of audit that would be demanded by inves-tors in the absence of Sarbanes-Oxley.

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In a private company audit, the focus is almost entirely on the financial information itself. We would gain a basic understand-ing of our client’s accounting processes and procedures to identify potential risks. Then we would proceed to spend the bulk of our time substantively testing the financial state-

critical because it severely limits the client’s ability to mislead its auditors without being caught. For this reason, third-party evidence is rightly viewed as the strongest form of au-dit evidence available.

Because control testing is not required for a standard private company audit, relatively little time is spent on it. Instead, the empha-sis in a private company audit is where it should be—on the accounting information itself. After all, the investors and owners of the company are most interested in whether the financial information they’re reviewing is reliable. They likely care much less about whether, for example, the controller forgot to sign his initials on a sales invoice to docu-ment his review, provided the revenue itself was deemed legitimate.

By contrast, in a public company audit, the focus of the audit is shifted towards controls procedures. This occurs primarily because control testing tends to be much more time-consuming than substantive audit proce-dures. Control testing begins with a detailed and thoroughly documented walkthrough of every significant financial process. Depend-ing on the complexity of the process and or-ganization, this would likely require schedul-ing interviews with many different members of the client’s staff. In the walkthroughs, key controls must be identified to cover each significant financial statement account. All of these controls must be documented and tested and any deficiencies identified are written up at length. This provides interest-ing work for young auditors, who are basi-


“It also provides lucrative fees for the audit firms themselves. Unfortunately,

it doesn’t provide much in terms of audit evidence about the actual

financial statements.”

ments and underlying accounting informa-tion. Substantive testing includes procedures like confirming bank account balances di-rectly with the client’s bank, obtaining ship-ping documentation and payment evidence to verify delivery of goods to customers, and so on. A key aspect of substantive testing is that it relies extensively on information from third-party sources—customers, ven-dors, banks, shipping companies, etc. This is

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cally required to job shadow unsuspecting members of the client staff. It also provides lucrative fees for the audit firms themselves. Unfortunately, it doesn’t provide much in terms of audit evidence about the actual fi-nancial statements.

Much of this control testing work can be performed prior to year-end, before the ma-jority of the substantive procedures can be-gin. But there is still a large amount of control work that must be performed after year-end as well. Given the tight time constraints of the year-end audit and finite resources, this inevitably suggests a reallocation of resourc-es from substantive testing towards controls testing.

Additionally, in many cases, the substitu-tion of controls testing for substantive test-ing is quite explicit. For example, suppose sales revenue is determined to have high in-herent risk in an audit. Based on this risk, the size of the account, and the established materiality for the audit, let’s further sup-pose that our audit procedures would call for a sample size of 100. In a pure financial statement audit (like most private company audits), the auditor would likely proceed to test that sample of 100, acquire the neces-sary evidence, and draw a conclusion. How-ever, in a public company audit, the auditor is already required to test internal controls around this account. If the associated con-trols are found to be operating effectively, the auditor can argue that the controls re-duce the risk of material misstatement and significantly reduce the sample size required

for substantive testing as a result—perhaps down to 50 of 100. The logic here is that the evidence gained from related controls test-ing can be used to justify performing less substantive procedures.

While this may sound intuitive, it’s im-portant to step back and see the irony in this


“In the Enron scandal, one of the problems was that the external auditors

did not sufficiently question and challenge the aggressive accounting practices employed by their client. In other words, it can be said that the

auditors relied upon the client too much.”

outcome. In the Enron scandal, one of the problems was that the external auditors did not sufficiently question and challenge the aggressive accounting practices employed by their client. In other words, it can be said that the auditors relied upon the client too much. When controls testing is substituted for substantive procedures, I would argue that a

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related phenomenon is occurring. In effect, the auditor is relying on the client’s internal processes and policies to justify performing less direct substantive testing. This tactic is occasionally used in private company audits as well, but it is systematically encouraged by Sarbanes-Oxley in public company audits

area that investors and stakeholders likely care about the most—namely, the reliability of the financial statements and disclosures—auditors are spending less time than they would have without the Sarbanes-Oxley re-quirement to opine on internal controls.

LMR: Ironically, the housing crash was blamed on the “deregulated free market” that reigned in the financial sector after Sar-banes-Oxley passed. Because of this, Dodd-Frank was passed. Do you have any thoughts on this cycle? Do you think the regulators “got it right” this time?

ES: I suspect the regulators didn’t “get it right” this time either. But in their defense, they have assigned themselves an impossible task. With Dodd-Frank, the government seems to be trying to address the consequences of the moral hazard in the banking sector with-out actually eliminating the moral hazard it-self. It’s a very tall order.

Given my current employment at a bank, I’ll leave it to others to offer an in-depth assessment of Dodd-Frank’s requirements. But speaking strictly as a private citizen, I am intrigued by the stress-testing compo-nent of Dodd-Frank. For readers that may not be familiar, this is where the Federal Re-serve Board gives banks a set of economic scenarios, and the banks are required to proj-ect how they would fare under each. One of the scenarios provided features a sharp eco-nomic downturn, and the purpose of the test is to verify that the bank will be able to re-main adequately capitalized even if another


“In the name of preventing future audit failures, Sarbanes-Oxley

required external auditors to dilute their focus on the financial statements

themselves.”

since the control testing has to be performed anyway.

This is one key unintended consequence of the Act. In the name of preventing future audit failures, Sarbanes-Oxley required ex-ternal auditors to dilute their focus on the fi-nancial statements themselves. The demand for audit services went up, and the auditors themselves surely performed more work, re-sulting in higher compliance costs. But in the

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recession strikes.

What fascinates me most about this pro-cess is that the Fed provides a detailed set of macroeconomic variables for nine quar-ters out and then asks banks to respond. In terms of providing a simulation, this seems to be self-defeating. Presumably, one of the most significant problems that banks con-front in an economic downturn is the mas-sive amount of uncertainty: When is the economy going to recover? What are inter-est rates going to do? And so on. How the bank responds to that uncertainty may well determine whether it survives.

But in the stress test, uncertainty doesn’t exist; the bank knows the exact trajectory of the US economy, at the outset, for the next nine quarters. I’d like to think that if all banks had a perfectly reliable macro-crystal ball at the start of the next recession, few, if any, would fail. And perhaps that assertion is itself worth testing. But it seems to be an exceptionally poor approximation of reality.

With regards to the current cycle, I’m most concerned about the rise of negative-yielding bonds around the world. Bond pric-es appear so far removed from fundamentals at this point that they seem to be a possible epicenter for the next downturn.

I’m also anxiously awaiting the upcoming US debt ceiling debate in March of next year. Since the power dynamics have switched, it will be enjoyable to see how many hypocriti-cal partisans are revealed on both sides of the

aisle. Beyond that, I’m wondering if Donald Trump’s previous off-the-cuff remarks about defaulting on the US debt might figure into the debate and raise the stakes of the nego-tiation. I’m pessimistic about the outcome in the short-run. But I’m hopeful that the debate could plant a few seeds of doubt re-garding the allegedly “risk-free” nature of US debt.


“But in the stress test, uncertainty doesn’t exist; the bank knows the exact

trajectory of the US economy, at the outset, for the next nine quarters.”

LMR: Has your knowledge of Austrian eco-nomics helped you in your career? If so, how?

ES: I would say yes, but only in indirect ways.

To me, studying economics is beneficial because it makes one think very precisely about cause and effect. In theory, this vir-tue would apply to all schools of econom-ics. However, it is especially evident in the

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understand why it was passed, and then pre-dict some of the unintended consequences that will result. There’s something consoling about understanding the harms in advance, even if it they can’t be easily remedied.

For now, I’m still waiting to be asked about Austrian business cycle theory in a job inter-view, but Austrian economics has still served my career well in the meantime.


Austrian tradition since logical reasoning is at the heart of it.

This skill turns out to be surprisingly useful in accounting when it comes to as-sessing risks, evaluating entries, developing new procedures and policies, and other ar-eas. Additionally, all professions seem to be impacted by some type of regulation, and I find Austrian economics helpful in dealing with this reality. Personally, I find it very sat-isfying to be able to learn about a regulation,

“With Dodd-Frank, the government seems to be trying to address the consequences of the moral hazard in the banking sector without actually eliminating the moral hazard itself.

It’s a very tall order.”

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37 L M R N O V E M B E R 2 0 1 6

EVENTS & ENGAGEMENTS

Events And Engagements

SOME EVENTS MAY BE CLOSED TO GENERAL PUBLIC. FOR MORE INFORMATION: [email protected]

NOTE: MANY OF THESE EVENTS ARE OPEN TO THE PUBLIC. CONTACT US FOR FURTHER DETAILS.

NOVEMBER 1, 2016WASHINGTON, DC

Murphy talks about the business cycle at American University

NOVEMBER 5, 2016DALLAS, TX

Murphy discusses the dangers of voting at Mises Circle

NOVEMBER 15, 2016HILLSDALE, MI

Murphy lectures on Austrian Economics at Hillsdale College

NOVEMBER 15-17, 2016ST. LOUIS, MO

Nelson Nash, Lara, and Murphy teach IBC at Freedom Advisor event

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40 L M R N O V E M B E R 2 0 1 6LMR SEPTEMBER 201040

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If you don’t like giving large sums of money to banks and mortgage companies to finance your cars, homes, boats, capital expenditures for business needs or any thing else you need to finance, then you are going to really like this alternative. The rebirth of PRIVATIZED BANKING is underway. You can take advantage of the years of

experience that these three authors in these two books are offering you.

Go to LARA-MURPHY.COM to find these and other fine books.

BAILOUTFUND YOUR OWN

the city of god, part i · 2016-12-09 · 2 lmr no 2016 trump can’t avoid a crash by robert p....

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